Cost-Volume-Profit

CVP ANALYSIS
 Objectives:
Discuss the relationships of cost, volume
1
of sales, and profit and how it helps in
managerial decision-making.

2 Define and explain CVP analysis.

Identify the different elements that

3 influence profit and explain terms
relevant to CVP analysis.

4 Discuss key assumptions of the CVP

analysis.
Objectives:
Determine the break-even point using the
contribution margin approach, equation
5
approach, target net income approach and
through graphing CVP relationships.

Apply CVP analysis through safety margin and

analysis of CVP relationships in terms of
6
changes in fixed costs, variable costs, selling
price, and volume.

Compute for the break-even point in

7 CVP relationships in a multiple product
set-up.

Explain the role of cost structure and

8
operating leverage in CVP relationships.
Cost-Volume-Profit Analysis
❑ Is a fundamental financial analysis or a profit planning
tool that explores the relationship between costs, sales
volume, and profitability.

❑ It assists businesses in understanding how changes in

costs and volume affect their profits, aiding in decision-
making related to pricing, production levels, and
operational efficiency to optimize profitability.

❑ A systematic method of examining the effects of activity

on its costs, revenue, and profit. In other words, CVP
analysis helps in analyzing the effects of change in
selling price or sales volume or sales mix or fixed costs
on the profits of the firm.
Elements of CVP Analysis
➢ The following internal elements affect the profitability
level of a business:

1) SALES
a. Selling Price
b. Units or Volume
2) TOTAL FIXED COST
3) VARIABLE COST PER UNIT
4) PRODUCT or SALES MIX

A manager must understand the

interactions and relationships of
the above-mentioned elements
with each other so that correct
economic decisions can be made.
 APPLICATIONS OF CVP ANALYSIS
Planning and decision-making, which may involve choosing the:

❖ type of product to produce and sell

❖ pricing policy to follow
❖ marketing strategy to use
❖ type of productive facilities to acquire
❖ accepting or rejecting sales orders
❖ feasibility of profit plan
❖ technology use
ASSUMPTIONS OF CVP ANALYSIS
➢ A CVP Analysis becomes effective and meaningful in making
economic decisions if the following assumptions are present:

All costs are classified as fixed costs and variable costs.

The fixed cost remains constant within the relevant range.

The variable cost changes in proportion to the changes in activity

levels (ex. volume).

The product or sales mix is considered constant.

Inventories do not significantly change.

The business operates under normal operating conditions.

Volume is the greatest factor affecting costs.

ASSUMPTIONS OF CVP ANALYSIS
➢ FIXED COST
- is a cost that remains constant in total but changes inversely to the
volume of unit cost
- Ex. salaries of employees, rent, utility bills, taxes, loans, and
insurance

➢ VARIABLE COST
- is a cost that changes in total but remains in fixed in unit cost
- Ex. Cost of materials used, cost of labor, delivery cost, and
manufacturing supplies

➢ MIXED COST
- cost that carries the behavior of both the fixed and variable costs
- a CVP analysis, however, classifies costs into fixed and variable
costs. Hence, the mixed cost must be split into its fixed and
variable components
 THE CONTRIBUTION MARGIN
INCOME STATEMENT
➢ The costs and expenses in the Contribution Margin Income Statement are
classified as to behavior (variable and fixed). The amount of contribution
margin, which is the difference between sales and variable costs.

CONTRIBUTION MARGIN INCOME STATEMENT

Sales (units x selling price) Pxxxx
Less Variable Cost (units x variable cost per unit) (xx)
Contribution Margin xxx
Less Fixed Cost (xx)
Profit (Income before Tax) xxx
➢ The contribution margin income statement is prepared for management’s
own use. The format facilitates Cost-Volume-Profit Analysis.
➢ Contribution Margin is a measure of a company’s ability to cover variable
costs with revenues. It is also known as marginal income, profit contribution,
contribution to fixed cost, incremental contribution.
 CONTRIBUTION MARGIN INCOME STATEMENT
Sales (units x selling price) P xxxx
Less Variable Cost (units x variable cost per unit) (xx)
Contribution Margin xxx
Less Fixed Cost (xx)
Profit (Income before Tax) P xxx

Cost-Volume-Profit Analysis
1. COST = composition of Variable and Fixed Costs

2. Volume = basically the units sold or produced

3. Profit = Income before tax

 CVP Analysis
BREAK-EVEN POINT
Break-even point is the sales level at which profit is zero
Ex. Total revenues = Total costs

MARGIN OF SAFETY
is the maximum amount by which sales could decrease
without incurring a loss

PRODUCT / SALES MIX

is the proportion of different products that comprise the
company’s total sales

DEGREE OF OPERATING LEVERAGE

measures how sensitive the pre-tax profit is to sales volume
increases and decreases. It is also known as Operating leverage
factor (OLF)
BREAK-EVEN ANALYSIS
Break-even analysis is the effort of comparing income from sales to
the fixed costs of doing business. The analysis seeks to identify how
much in sales will be required to cover all fixed costs so that the
business can begin generating a profit.
Break-even point - the sales volume level (in pesos or in units) where
total revenues equals total costs, that is, there is neither profit nor
loss.

The process of calculating the number of units of a good or service a

company must sell to cover all of its costs.

Break-even analysis in economics, business, and cost accounting

refers to the point at which total costs and total revenue are equal. A
break-even point analysis is used to determine the number of units
or pesos of revenue needed to cover total costs (fixed and variable
costs).
 CONTRIBUTION MARGIN INCOME STATEMENT
Sales (units x selling price) Pxxxx
Less Variable Cost (units x variable cost per unit) (xx)
Contribution Margin xxx
Less Fixed Cost (xx)
Profit (Income before Tax) xxx

BREAK-EVEN POINT

1. Profit = 0
2. Sales = VC + FC
3. CM = FC
 BREAK-EVEN POINT
1. Break-even Point in Pesos

Fixed Cost FC
BEP/pesos = BEP/p =
Contribution Margin Ratio CMR

2. Break-even Point in Units

Fixed Cost FC
BEP/units = BEP/u =
Contribution Margin per Unit CM/u

3. Break-even Point Ratio = Breakeven point ÷ Sales

 CONTRIBUTION MARGIN INCOME STATEMENT
Sales (units x selling price) Pxxxx
Less Variable Cost (units x variable cost per unit) (xx)
Contribution Margin xxx
Less Fixed Cost (xx)
Profit (Income before Tax) xxx

Contribution Margin = Sales - Variable cost

Contribution Margin per Unit = Unit Sales - Unit Variable cost

Contribution Margin Ratio = Contribution Margin ÷ Sales

Contribution Margin Ratio = CM per unit ÷ Sales per unit

 BREAK-EVEN POINT
Sylvia Celeste Habimbi Cortesi Company presents the following
information:
CONTRIBUTION MARGIN INCOME STATEMENT
Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
Less Fixed Cost 800,000
Profit (Income before Tax) xxx

Sales price per unit P 400.00

Variable cost per unit P 240.00
 CONTRIBUTION MARGIN INCOME STATEMENT
BREAK-EVEN POINT Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
1,200,000
Less Fixed Cost 800,000
Profit (Income before Tax) xxx
400,000
Sales price per unit P 400
1. Break-even Point in Units Variable cost per unit P 240
Contribution Margin per Unit P 160
Fixed Cost
BEP/units =
CM per Unit CM/u = Sales/u − VC/u
800,000
BEP/units =
160

BEP/units = 5,000 units

 CONTRIBUTION MARGIN INCOME STATEMENT
BREAK-EVEN POINT Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
1,200,000
Less Fixed Cost 800,000
Profit (Income before Tax) xxx
400,000
Sales price per unit P 400
2. Break-even Point in Pesos Variable cost per unit P 240
Contribution Margin per Unit P 160
Fixed Cost
BEP/pesos = CMR = CM ÷ Sales
Contribution Margin Ratio
CMR = 1,200k ÷ 3M
800,000
BEP/pesos = CMR = .40 or 40%
40%

BEP/pesos = P 2,000,000
 CONTRIBUTION MARGIN INCOME STATEMENT
BREAK-EVEN POINT Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
1,200,000
BEP/units = 5,000 units Less Fixed Cost 800,000
Profit (Income before Tax) xxx
400,000
BEP/pesos = P 2,000,000
Sales price per unit P 400
Variable cost per unit P 240
Contribution Margin per Unit P 160
Equation Approach:
To prove that the Break-even level of the business is P2,000,000 or at
5,000 units, the following computation is presented:
NI or BE = Sales Revenue - Variable Cost - Fixed Cost
BE = P400x - P240x - 800,000
BE = (P400 x 5000 units) - (P240 x 5,000 units) - 800,000
BE = 2,000,000 - 1,200,000 - 800,000
BE = 0
GRAPHING CVP RELATIONSHIPS
GRAPHING CVP RELATIONSHIPS
Prepare the break-even graph for La Grande Dame Company
based on the following information:
TOTAL PER UNIT

Net Sales P 500,000 P 10

Variable Cost (300,000) 6
Contribution Margin 200,000 4
Fixed Cost (150,000) 3
Profit (Income before Tax) 50,000 1

Units sold 50,000 units

 GRAPHING CVP RELATIONSHIPS

Matrix Table:
Units sold - 10,000 20,000 30,000 40,000 50,000
Sales revenue - 100,000 200,000 300,000 400,000 500,000
Variable cost - 60,000 120,000 180,000 240,000 300,000
Fixed Cost 150,000 150,000 150,000 150,000 150,000 150,000
Total Cost 150,000 210,000 270,000 330,000 390,000 450,000
GRAPHING CVP RELATIONSHIPS

Revenue
(375,000)

Cost Break-even point FC

BEP/p =
CMR
150,000
BEP/p =
40%
BEP/p = 375,000
 REQUIRED SALES WITH DESIRED/ TARGET PROFIT
The Breakeven formula may be expanded to compute for the
required sales (in units or in pesos) to earn a desired amount of profit

Fixed Cost + Desired Profit

Required Sales in units =
Contribution Margin per unit Profit
before Tax
Fixed Cost + Desired Profit
Required Sales in pesos =
Contribution Margin Ratio
 REQUIRED SALES WITH DESIRED/ TARGET PROFIT
Beatrice Luigi Gomez is a manufacturer of teddy bears which currently
sells at P250.00 per unit. Variable costs per unit includes P80.00 in
materials, P50.00 in labor, P20.00 in variable overhead, and P10.00 in
variable selling and administrative espenses. Fixed manufacturing
costs per period amounts to P90,000. The entity’s desired net income
is P270,000.00

Required:
1. How much units should the entity sell every month to achieve the
target net income?

2. How much sales should the entity sell every month to achieve the
target net income?
 REQUIRED SALES WITH DESIRED/ TARGET PROFIT
The expected sales volume in units for a Unit Selling price 250.00
desired profit of P270,000 Unit Variable Cost
Materials 80.00
Labor 50.00
Fixed Cost + Desired Profit
R. Sales in units = Overhead 20.00
Contribution Margin Unit Selling and Admin 10.00
Contribution Margin Unit 90.00
90,000 + 270,000
R. Sales in units = Fixed Cost 90,000.00
90
R. Sales in units = 4,000 units
 REQUIRED SALES WITH DESIRED/ TARGET PROFIT
Unit Selling price 250.00
The expected sales volume in pesos for
Unit Variable Cost
a desired profit of P270,000 Materials 80.00
Labor 50.00
Fixed Cost + Desired Profit Overhead 20.00
R. Sales in pesos = Selling and Admin 10.00
Contribution Margin Ratio
Contribution Margin Unit 90.00
90,000 + 270,000
R. Sales in pesos = Fixed Cost 90,000.00
36%
R. Sales in pesos = P 1,000,000
CMR = CM/u ÷ Sales/u
CMR = 90 ÷ 250
CMR = .36 or 36%
 MARGIN OF SAFETY
The amount of peso-sales or the number of units by which actual or
budgeted sales may be decreased without resulting into a loss.

The margin of safety (MOS) is the difference between your gross

revenue and your break-even point. Your break-even point is where
your revenue covers your costs but nothing more. In other words,
your business does not make a loss but it doesn’t make a profit
either.

The margin of safety is the excess of budgeted (or actual) sales over
the break-even volume of sales.
 MARGIN OF SAFETY
1. Margin of Safety (units or pesos)

Margin of Safety = ❖ Sales – Breakeven Sales

Margin of Safety = Profit ÷ CM Ratio
Profit / NI = MOS x CM Ratio
❖ Sales = Actual / Targeted/ Budgeted/ Planned

2. Margin of Safety Ratio

MOS Ratio = Margin of Safety ÷ Sales

MOS Ratio = Profit Ratio ÷ CM Ratio

MOS Ratio = 100% − BEP sales Ratio

 MARGIN OF SAFETY
Sylvia Celeste Habimbi Cortesi Company presents the following
information:
CONTRIBUTION MARGIN INCOME STATEMENT
Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
Less Fixed Cost 800,000
Profit (Income before Tax) xxx

Sales price per unit P 400.00

Variable cost per unit P 240.00
 CONTRIBUTION MARGIN INCOME STATEMENT
MARGIN OF SAFETY Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
Contribution Margin xxx
1,200,000
BEP/units = 5,000 units
Less Fixed Cost 800,000
BEP/pesos = P 2,000,000 Profit (Income before Tax) xxx
400,000
Sales price per unit P 400
Variable cost per unit P 240
Contribution Margin per Unit P 160

Margin of Safety = Sales in pesos – Breakeven Sales

Margin of Safety = 3,000,000 - 2,000,000
Margin of Safety = P 1,000,000

Margin of Safety = Sales in units – Breakeven Sales in units

Margin of Safety = (3,000,000 / 400) - 5,000
Margin of Safety = 2,500 units
 CONTRIBUTION MARGIN INCOME STATEMENT
MARGIN OF SAFETY Sales Revenue P 3,000,000
Less Variable Cost 1,800,000
BEP/units = 5,000 units Contribution Margin xxx
1,200,000
Less Fixed Cost 800,000
BEP/pesos = P 2,000,000 Profit (Income before Tax) xxx
400,000
Sales price per unit P 400
Margin of Safety = P 1,000,000
Variable cost per unit P 240
Contribution Margin per Unit P 160
MOS Ratio = ????
MOS Ratio = MOS ÷ Budg. Sales Contribution Margin Ratio .40 or 40%
MOS Ratio = 1,000,000 ÷ 3,000,000
MOS Ratio = .33 or 33%
Profit = ????
Profit = Margin of Safety x CM Ratio
Profit = 1,000,000 x 40%
Profit = P400,000
 PRODUCT/ SALES MIX
The sales mix is a calculation that determines the proportion of each
product a business sells relative to total sales. The sales mix is
significant because some products or services may be more
profitable than others, and if a company's sales mix changes, its
profits also change. Managing sales mix is a tool to maximize
company profit.

Sales mix refers to the variety of products offered by a company and

the profit generated from this range of products. It includes all of the
items a business offers for sale to consumers. The sales mix
considers the profit margin from each product and the ratio in
comparison to its total products. This means that different products
may have different profit margins, with some performing much
better than others with consumers.
 PRODUCT/ SALES MIX
1. Break-even Point in Pesos

Fixed Cost FC
BEP/pesos = BEP/p =
Weighted Average CMR WaCMR

2. Break-even Point in Units

Fixed Cost FC
BEP/units = BEP/u =
Weighted Average CM/u WaCM/u
 PRODUCT/ SALES MIX

WaCM/u = (CM/u x No. of units per mix) + (CM/u x No. of units per mix)

(CM/u x No. of units per mix) + (CM/u x No. of units per mix) + …..nth
WaCMR =
Total weighted sales in pesos

WaCMR = CMR per product x Sales mix rate(ratio) per product

Get the sum of each product
 PRODUCT/ SALES MIX
Pia Alonzo Wurtzbach Company has the following information:

Unit Selling price Amount

Product shoes P 360
Product bag 220
Unit Variable Cost
Product shoes P 200
Product bag 140
Product Mix
Product shoes 1
Product bag 2
Fixed Cost P 800,000
 Unit Selling price Amount
PRODUCT/ SALES MIX Product shoes P 360
Product bag 220
Unit Variable Cost
Fixed Cost Product shoes P 200
BEP/units = Product bag 140
Weighted Average CM/u Unit Contribution
Product Mix Margin
Product shoes 160
xxx
1
Product bag xxx
2
80
Fixed Cost P 800,000
Weighted Average CM/u = ??? Product Mix
Product shoes 1
Product bag 2
Fixed Cost P 800,000

WaCM/u = (CM/u x No. of units per mix) + (CM/u x No. of units per mix)
WaCM/u = (160 x 1) + (80 x 2)
WaCM/u = P 320
 Unit Selling price Amount
PRODUCT/ SALES MIX Product shoes P 360
Product bag 220
Unit Variable Cost
Fixed Cost Product shoes P 200
BEP/units = Product bag 140
Weighted Average CM/u Unit Contribution
Product Mix Margin
Product shoes 160
xxx
1
800,000
BEP/units = Product bag xxx
2
80
320 Fixed Cost
Product Mix P 800,000
Product shoes 1
BEP/units = 2,500 units Product bag 2
Fixed Cost P 800,000

To determine the number of units to break-even, the hypothetical numbers

of units are multiplied to the unit sales ratio. Hence,
Product Shoes = 2,500 units x 1 = 2,500 units
Product Bag = 2,500 units x 2 = 5,000 units
 Unit Selling price Amount
PRODUCT/ SALES MIX Product shoes P 360
Product bag 220
Unit Variable Cost
Fixed Cost Product shoes P 200
BEP/pesos = Product bag 140
Weighted Average CMR Unit Contribution
Product Mix Margin
Product shoes 160
xxx
1
Product bag xxx
2
80
Fixed Cost
Product Mix P 800,000
Product shoes 1
Weighted Average CMR = ??? Product bag 2
Fixed Cost P 800,000
 PRODUCT/ SALES MIX

(CM/u x No. of units per mix) + (CM/u x No. of units per mix)
WaCMR =
Total weighted sales in pesos

(160 x 1) + (80 x 2)
WaCMR =
(360 x 1) + (220 x 2)

WaCMR = 320 / 800

WaCMR = .40 or 40%

 Unit Selling price Amount
PRODUCT/ SALES MIX Product shoes P 360
Product bag 220
Unit Variable Cost
CMR Sales mix rate
WaCMR = x Product shoes P 200
per product per product Product bag 140
Shoes Bag Unit Contribution
Product Mix Margin
CMR 44% 36% Product shoes 160
xxx
1
(x) Sales mix rate 45% 55% Product bag xxx
2
80
(based on peso sales) Fixed Cost
Product Mix P 800,000
WaCMR 20% 20% Product shoes 1
Product bag 2
WaCMR = 40%
CMR Shoes = 160 / 360 = 44% Fixed Cost P 800,000
CMR Bag = 80 / 220 = 36%

SMR Shoes = 360 / 800 = 45% Shoes = P360 x 1 = 360

SMR Bag = 440 / 800 = 55% Bag = P220 x 2 = 440
Average 800
 Unit Selling price Amount
PRODUCT/ SALES MIX Product shoes P 360
Product bag 220
Unit Variable Cost
Fixed Cost Product shoes P 200
BEP/pesos = Product bag 140
Weighted Average CMR Unit Contribution
Product Mix Margin
Product shoes 160
xxx
1
800,000 Product bag xxx
2
80
BEP/pesos = Fixed Cost
Product Mix P 800,000
40% Product shoes 1
Product bag 2
Fixed Cost P 800,000
BEP/pesos = P 2,000,000
 PRODUCT/ SALES MIX
To prove that the hypothetical BE in units is 2,500, the following
computation is made

BE = Sales Revenue - Variable Cost - Fixed Cost

BE = (2500 units x P360) + (5,000 units x P220)

- (2500 units x P200) + (5,000 units x P140)
- 800,000
BE = (900,000 + 1,100,000) - (500,000 + 700,000) - 800,000
BE = 2,000,000 - 1,200,000 - 800,000
BE = 0
 PRODUCT/ SALES MIX
To prove that the hypothetical BE in pesos is 2,000,000 the
following computation is made

Product Shoes 2,000,000 x 45% = 900,000

Product Bag 2,000,000 x 55% = 1,100,000

TOTAL 2,000,000
 DEGREE OF OPERATING LEVERAGE
The extent to which a company uses fixed costs in its costs structure

Leverage is achieved by increasing fixed cost while lowering variable

costs

Used to measure the extent of the change in profit before tax

resulting from the change in sales

The degree of operating leverage (DOL) is a multiple that measures

how much the operating income of a company will change in
response to a change in sales. Companies with a large proportion of
fixed costs (or costs that don't change with production) to variable
costs (costs that change with production volume) have higher levels
of operating leverage.
DEGREE OF OPERATING LEVERAGE
DOL or OLF = Total CM ÷ Profit before tax
DOL or OLF = CM Ratio ÷ Profit Ratio

DOL or OLF = 1 ÷ MOS Ratio

DOL or OLF = % in Profit before tax ÷ % in Sales

% in Profit before tax = % in Sales x DOL or OLF

DEGREE OF OPERATING LEVERAGE
Following is the Catriona Magnayon Gray company’s result of
operations from its present sales level of 10,000 units.

CONTRIBUTION MARGIN INCOME STATEMENT RATIO

Sales @5.00 100%

Less Variable Cost @3.00

Contribution Margin

Less Fixed Cost 12,000

Profit (Income before Tax)

 DEGREE OF OPERATING LEVERAGE
CONTRIBUTION MARGIN INCOME STATEMENT RATIO
Sales @5.00 P 50,000 100%
Less Variable Cost @3.00 30,000
Contribution Margin 20,000
Less Fixed Cost 12,000
Profit (Income before Tax) 8,000

DOL or OLF = Total CM ÷ Profit before tax

DOL or OLF = 20,000 ÷ 8,000
DOL or OLF = 2.5
 DEGREE OF OPERATING LEVERAGE
CONTRIBUTION MARGIN INCOME STATEMENT RATIO
Sales @5.00 P 50,000 100%
Less Variable Cost @3.00 30,000
Contribution Margin 20,000
Less Fixed Cost 12,000
Profit (Income before Tax) 8,000

DOL or OLF = CM Ratio ÷ Profit Ratio

DOL or OLF = 40% ÷ 16%

DOL or OLF = 2.5

 DEGREE OF OPERATING LEVERAGE
CONTRIBUTION MARGIN INCOME STATEMENT RATIO
Sales @5.00 P 50,000 100%
Less Variable Cost @3.00 30,000
Contribution Margin 20,000
Less Fixed Cost 12,000
Profit (Income before Tax) 8,000
If the company’s sales would increase by 10%, how much is the %
change in profit?

% in Profit = % in Sales x DOL

% in Profit = 10% x 2.5

% in Profit = 25%
 DEGREE OF OPERATING LEVERAGE
Proof
PRESENT % CHANGE PROPOSED
Sales @5.00 P 50,000 10%
Variable Cost @3.00 30,000 Same 10%
Contribution Margin 20,000 Same 10%
Fixed Cost 12,000 FIXED
Profit (Income before Tax) 8,000

% in Profit = ?????%

% in Profit = (10,000 - 8,000) / 8,000

% in Profit = 25%